Asem forum to boost Asian Bond Market

Pavin Chachavalpongpun, The Nation Asia News Network, Bangkok

Earlier this month, Asia and Europe shared an upbeat view of the world economy at the end of the annual Asian-Europe Meeting (ASEM) of finance ministers Meeting in Bali, Indonesia. One of the highlights was Europe's endorsement of the Asian Bond Market, designed to funnel Asia's huge pool of savings directly into Asian investments. Further consultation on ways to strengthen cooperation will be pursued at the ASEM foreign ministers meeting today and tomorrow.

When ASEM was born in 1996, Asia and Europe recognized the need to forge a new kind of cooperation. Unexpectedly, Europe witnessed Asia's financial meltdown in the aftermath of the 1997 crisis. Europe saw how, behind the facade of economic success, Asia was laid low by its vulnerability due to the lack of regional financial stability.

Only recently have Asian economies made a comeback. When Thailand announced the first "Asia for Asia" network through the creation of the Asia Cooperation Dialogue (ACD) in 2002, Europe was anxious to engage in a new partnership with ACD.

When Thailand initiated the Asian Bond Market development under the ACD framework, the opportunity for such engagement became clear. The launch of the first Asian Bond Fund, endorsed by 11 Asian central banks, resulted in the pooling of reserves to establish a US$1 billion (Bt43 billion) regional bond market.

Furthermore, at the recent ACD meeting, participants saw the merit of having ACD financial experts explore the possibilities of setting up Asian Bond Fund 2 to enable other Asian countries to participate in Asia's own financial arrangement. India has already expressed interest in putting forward $1 billion to start up the Asian Bond Fund 2.

The concept of an Asian Bond Market was met with a favorable response from European leaders. Pascal Lamy, the EU Trade Commissioner, told Prime Minister Thaksin Shinawatra that the Asian Bond Market was a very good idea for mobilizing regional funds, for Asia to invigorate its own financial system and to whittle away the region's financial vulnerability.

The premier stressed the need to keep Europe abreast of the latest developments. He proposed through Asem last year a Task Force for Closer Economic Partnership, with special emphasis on the Asian-Euro Bonds linkage, the creation of a Euro Bond Market in Asia and the use of the euro as a major currency in the region -- all moves that would reduce Asian vulnerability from dollar- denominated debt instruments.

The use of the euro as a reserve currency and as a means of transaction in Asian financial and commercial markets would enable Europe to make a greater contribution to the development of Asia's new financial architecture, providing confidence and financial security by spreading the risks from sudden shocks.

But Europe has cautioned that, at this embryonic stage, a lot more needs to be done in the development of the Asian Bond. Asia will have to make sure that it is able to stimulate a regional convergence before proceeding to capital market integration. Europe can help provide technical training to further refine Asian capital market infrastructures, such as rating agency standards, a settlement system, tax impediment, currency risk and exchange control liberalization.

Europe's contribution to Asia's financial structure was revealed during the first ASEM Task Force Meeting in May. The outcome of the meeting reflected Europe's enthusiasm to form a new forum for Asem to discuss the European experience in financial integration, its successes and obstacles.

Participants from Europe pointed out that the prerequisites for the realization of the Asian Bond Market include firm political support from Asian leaders in order to achieve a successful regional economic and financial integration, and regional cohesion in the process leading to intra- and inter- regional integration.

Thailand is fully aware of the significance of mustering political support from other Asian leaders. On the one hand, other cooperative frameworks have been promoting various aspects of the Asian Bond Market's development. On the other hand, Thailand has been emphasizing the role of the ACD as a forum where political support of Asian leaders can best be expressed.

The success of the Asian Bond Market also depends very much on the involvement of other players outside the region to guarantee that this regional bond market complies with strict market-based rules, the logic of good governance and institutional transparency. The Asem Task Force is working hard to encourage Europe to actively engage in the process.

To reaffirm their commitment to the Asian Bond Market, ACD members adopted the Chiang Mai Declaration on the Asian Bond Market Development during the second ACD Meeting as a guideline for future development.

From a European perspective, it expects the future expansion of the Chiang Mai Initiative from a regional outfit to a multilateral arrangement. Europe sees its engagement in the Asian Bond Market as a move to enhance existing strong ties between the two continents through their cooperation under the ASEM framework.

Europe wants to play an important role in Asian financial integration, whereas Asia sees a need to get Europe involved so that it can learn from the best European practices. This ASEM Foreign Ministers Meeting will help Asia move forward the Asian Bond institutional building process.

Dr Pavin Chachavalpongpun is an official in the Department of International Economic Affairs, Ministry of Foreign Affairs.